GM Recalls Could Turn into a Windfall for Dealers

GM Recalls Could Turn into a Windfall for Dealers

GM will pay dealers — independent businesses licensed to sell and repair GM vehicles — to fix up to 6 million vehicles recalled so far this year. The total includes 2.2 million of GM’s Chevrolet Cobalt and other older vehicles equipped with a faulty ignition switch linked to 13 deaths. Above, the ignition switch of a 2005 Cobalt, which is included in the recall. (Molly Riley / Associated Press)

By Jerry Hirsch

April 23, 2015

General Motors’ giant recall scandal looks to have a silver lining for GM dealers — millions of dollars in lucrative repair bills that their service departments can charge back to the nation’s biggest automaker.

The car company will pay dealers — independent businesses licensed to sell and repair GM vehicles — to fix up to 6 million vehicles recalled so far this year. The total includes 2.2 million of GM’s Chevrolet Cobalt and other older vehicles equipped with a faulty ignition switch linked to 13 deaths.

This year’s torrent of recalls are good business for dealers of other brands, too. Toyota has recalled almost 2.5 million vechiles this year. Other recent big recalls include 650,000 Jeep Grand Cherokees and Dodge Durangos; 1 million cars from Nissan, including its popular Altima and Sentra sedans; and nearly 900,000 Honda Odyssey minivans.

“Recalls are definitely good for business. Smart dealers actively market recalls by calling up customers,” said Jeremy Anwyl, an industry consultant and former chief executive of auto information company Edmunds.com. “They make money doing the work that is required, and then they get a car into the shop that might need something else, if only an oil change. We tend to under-maintain cars.”

The switch issue has prompted congressional hearings and probes by the National Highway Traffic Safety Administration and the Department of Justice into why GM didn’t recall the cars until this year even though it knew about the problem for a decade. It also sparked an internal investigation and overhaul of the way GM issues recalls, prompting the callback of millions of other vehicles for unrelated problems.

Recalls are definitely good for business. Smart dealers actively market recalls by calling up customers.– Jeremy Anwyl, an industry consultant

In addition to GM’s recall troubles, Toyota this year paid a $1.2-billion fine to settle a four-year federal criminal investigation into whether it properly told regulators about safety complaints concerning sudden acceleration. The heightened scrutiny on auto safety, analysts say, has sparked more recalls from the whole industry.

Automakers are recalling cars at a record pace — 13 million so far this year. The previous peak came in 2004, with 30.8 vehicles recalled.

“Other manufacturers don’t want to be caught with a bad recall that was left undone,” said Efraim Levy, who follows the auto industry for S&P Capital IQ.

NHTSA, which has faced congressional criticism for not forcing GM to fix the ignition switch defect years ago, also is becoming more aggressive, analysts said.

“If you are a regulator and can go to Congress and say, ‘We increased the number of recalls,’ you look like a success,” Anwyl said.

The cost of fixing all those cars adds up quickly, and dealers are the prime beneficiaries. Already, GM has set aside $1.3 billion to order new parts, provide rental cars to owners and pay dealers to make repairs.

GM has told its dealers it would pay for 78 minutes of labor to repair the cars with the faulty ignition switches. The hourly labor rates vary by region, but that could easily amount to $100 per vehicle, according to dealers contacted by The Times. If the millions of other recalled vehicles take about the same amount of time to repair, and all the cars are fixed, dealers could generate about $600 million of revenue from the recalls.

Dealers also reported getting $30 to $40 a day, or about $300 a week, to provide loaner cars to owners who are afraid to drive the vehicles with the faulty switch. GM said it could take until nearly the end of the year to fix all the cars.

Automakers walk a fine line determining what they pay dealers for repairs, said Peter Hoffman, the owner of Sierra Chevrolet in Monrovia. Automakers also want the business to be profitable “because they want the dealer to want to do the work and get it done,” Hoffman said.

Hoffman and other dealers acknowledged that they would make money from the recalls, but generally avoided talking about benefits they might accrue from GM’s rash of recalls.

“Sure, we hope to be able to do other work for the customers who bring in their cars, but that is not the driving consideration,” Hoffman said. “The context isn’t positive.”

In general, recalls don’t make dealers happy, despite any revenue they might generate, said Aaron Jacoby, who runs the national automotive practice for the Arent Fox law firm and represents dealers in litigation.

“Dealers are concerned for the reputation of the GM brand in the long term in the event that this short-term crisis is not handled properly,” Jacoby said.

How much dealers make from recalls will be limited by the number of owners who bother to get their cars fixed. Industry studies show that recall repair rates range from about 40% to 80%, with older vehicles, like those GM is now recalling, the least likely to be fixed.

Dealers usually check a vehicle when it comes in for an oil change or other service to see if there is recall work they can complete and bill to the manufacturer. But once a car warranty runs out, typically after 36 months, owners tend to get their vehicles serviced by independent shops. So the work often doesn’t get done unless they make a special trip back to the showroom.

The GM ignition switch recall models are 2003 to ’07 Saturn Ions, 2007 to ’10 Saturn Skys, 2006 to ’11 Chevrolet HHRs, 2006 to ’10 Pontiac Solstices, and 2005 to ’10 Chevrolet Cobalt and Pontiac G5 models. These are all models no longer produced. GM has stopped producing the Pontiac and Saturn brands.

GM has shipped dealers thousands of repair kits with ignition switches, ignition cylinders and key sets for the 2003 to ’07 cars in the group. It has sent out letters to 1.4 million owners of those vehicles asking them to make an appointment with a dealer for repairs.

Many of the models weren’t good cars to begin with, said David Cole, an analyst who heads AutoHarvest Foundation, a nonprofit at Wayne State University in Detroit that fosters technology transfer in the auto industry. They were budget models with cut-rate interiors and lacked many features of Japanese rivals such as the Toyota Corolla and Honda Civic, he said.

Large percentages were sold at a loss to rental car companies and other commercial customers, then resold into the used car market within two years. The oldest of the vehicles could easily be on their third or fourth owner and be worth just a few thousand dollars, Cole said.

“These cars will be down pretty low in the food chain, being driven by students, the working poor,” he said. “The population of owners of these cars would be among the least likely to be repaired.”